Fly under the Tax Radar: Informal Sales in the Process Industries

In the countries, where it is not possible to disclose corporate income through the banking system, tax evasion through informal sales with the help of a third party is a common phenomenon. This paper tries to model firms’ tax evasion in such a condition. How tax evasion relies on third parties and hiding the share of raw materials purchased in the financial statement depends on the production method. In this paper, the tax evasion will be investigated in the process production method. In addition to the gap between the value added tax rate and corporate income tax rate, the cost structure is an important endogenous factor in tax evasion. The empirical results of the model based on the data from Iran indicate that the tax evasion of process industries is about 18% of tax capacity, which results in a 4% reduction in the government’s tax revenue.